Time is flying, and the end of the year is quickly upon us. With distractions like the holiday season, it can be easy for individuals to lose focus on opportunities to reduce your tax bill in the spring. To assist you, we have compiled a list of our Top 7 tax saving strategies for you to consider before the end of the year. Do not miss out on these opportunities!
- Contribute to your 401(k), Traditional IRAs, and Other Tax-deferred Retirement Accounts.
It is never too early to start saving for retirement, and tax-deferred retirement accounts are a great way to simultaneously grow your money and lower your tax liability. If you work for an employer that provides a 401(k), it is highly recommended to contribute as much as you can afford up to a limit of $18,000 in 2016 for individuals under the age of 50. Individuals aged 50 or older can contribute an additional $6,000, which is known as a catch-up contribution. If you cannot afford to contribute the maximum, aim for contributing an amount that will be fully matched by your employer. For employees, the 401(k) deferral due date is the date of the last paycheck for 2016 or December 31, 2016.
Traditional IRAs are another great tax-saving retirement vehicle, and unlike 401(k) plans, anyone is eligible to participate. For 2016, the maximum contribution is $5,500 for individuals under the age of 50. For individuals aged 50 or older, an additional catch-up contribution of $1,000 is also permitted for a total deduction of $6,500. For 2016, the deadline to make this contribution is April 17, 2017, and no extension is permitted. If you are setting up a new IRA, applications postmarked by April 17, 2017 will be accepted by the IRS. However, if you or your spouse are covered by a retirement plan at work, exceeding certain income thresholds disallows the deductibility of these traditional IRA contributions. If you are single or head of household, the deduction is fully disallowed if your modified adjusted gross income reaches $71,000. If you are married filing jointly, the income phase out level is $118,000. Finally, if you are married filing separately, the phase out amount is merely $10,000. You are not required to make regular minimum distributions from a traditional IRA until you reach the age of 70 ½.
For self-employed individuals or small business owners, two additional retirement vehicles to consider are the Simplified Employee Pension (SEP) IRA and the Savings Incentive Match Plan for Employees (SIMPLE) IRA. An important distinction between these two options is that contributions to a SEP IRA are only permitted by the employer, while a SIMPLE IRA allows employees to contribute as well. For 2016, the maximum contribution to a SEP IRA is 25% of business income up to a cap of $53,000. Therefore, SEP IRAs allow much higher contributions than 401(k) or traditional IRAs. The maximum contribution for an employee in a SIMPLE Plan is $12,500 and a $3,000 catch-up for those employees aged 50 or older.
- Open up a Health Savings Account
Now is a great time to consider opening a health savings account (HSA). Contributions made to HSAs are fully deductible on your individual tax returns. However, not everyone is eligible to participate in a HSA. To be eligible, you must be covered by a high-deductible health plan (HDHP). A HDHP is a plan with a deductible of at least $1,300 for single coverage and $2,600 for family coverage. You are not eligible if any of the following applies:
- Your health insurance plan is not an HDHP
- You have health coverage in addition to the HDHP, with limited exceptions
- You are eligible as a dependent on someone else’s tax return
- You are enrolled in Medicare
- You or your spouse have health coverage under a flexible spending account (FSA)
If you meet these requirements, you are eligible to open a HSA. For 2016, the maximum contribution for single coverage is $3,350 and $6,750 for family. Under the last month rule, if you are eligible and open up your HSA by December 1, then you can contribute the maximum amount for the entire year rather than prorated by month. The due date for HSA contributions is April 17, 2017 and no extension is permitted.
- Take Capital Losses in 2016
Tax loss harvesting or selling underperforming investments before year end allows taxpayers to take capital losses in order to lower tax liability. These losses can used to offset dollar for dollar any capital gains realized throughout the year. Because December 31st falls on a Saturday in 2016, the deadline to sell investments to lock in losses is December 30th. If your total capital losses exceed your capital gains, you are allowed to deduct up to a maximum of $3,000, and the remaining loss is carried forward to next year. Tax loss harvesting is especially helpful to assist higher income taxpayers who are subject to the 3.8% Net Investment Income Tax. If you are expecting large capital gains for 2016, then be sure to consider taking losses before the calendar turns to 2017.
- Bunch your Schedule A Deductions
Similar to taking your capital losses at the end of the year, another strategy is to make payments before year end to maximize your itemized deductions on Schedule A. Taxpayers who itemize are aware of deductions such as:
- Medical costs
- State and local income taxes
- Mortgage interest
- Real estate taxes
- Charitable contributions
- Other miscellaneous deductions.
Depending on your income and deduction levels, it may be advantageous for you to push your deductions into one tax year rather than spread evenly over two years. Alternative minimum tax (AMT) is another area to consider when bunching itemized deductions since state, local, and real estate taxes are not deductible under AMT. If bunching the deductions in 2016 is beneficial, be sure to issue the checks for real estate taxes and any state and city 4th quarter estimates before the end of the year.
Also, do not forget about charitable contributions. For all cash and non-cash contributions of $250 or more, the IRS requires a signed letter from the charity specifically stating the name of the organization, the amount of the contribution, and that no goods or services were provided in return for the contribution. Additionally, the IRS allows taxpayers to donate investments directly from their investment accounts. If the donated asset was held for more than one year, you will receive the fair market value for the deduction. In addition, you avoid any capital gains on this investment. It is important to plan your costs now rather than scramble in late December.
- Pay your 4th Quarter Estimates
If you were set up to pay federal, state, or city estimated taxes for 2016, be sure to make these payments in a timely manner. The due date for making 4th quarter estimates is January 16, 2017. However, as previously discussed, if you would like the itemized deduction for state and local income taxes on Schedule A, then the state and local estimates need to be paid by December 30th. Paying estimates are important to not only reduce tax liability in the spring, but also to avoid any penalties for underpaying estimated tax during the year. We are ready to assist you with income projections and estimated taxes for your specific tax situation.
- File Timely and Apply for Direct Deposit
Be sure to organize your tax documents and send to your accountant as soon as possible in the spring. The vast majority of forms, including W-2s, 1099s, and 1095s, are due to employees by January 31, 2017. Getting your documents in early, especially through electronic delivery, assures your taxes will be filed timely, and, if applicable, you will receive your refund quicker. Also, direct deposit of refunds is another method to ensure quicker processing of your applicable refunds.
Don’t wait until the end of the year to start thinking about these moves! Whether you’re a current client or prospect, our team of experts will discuss the best options for you and your family. If you have questions on any of these deductions or would like to discuss your specific individual situation, contact us by email at firstname.lastname@example.org or call at 216.524.8900.